Diane Swonk, Chief Economist
August 25, 2010 – 9:20 a.m. CT
New Home Sales Hover Near Record Lows
New home sales slid more than 12% in July to an abysmal 276,000 unit rate, remaining at record lows, despite a marginal rebound in June. Moreover, prices softened, as home-builders have started to downscale their homes to lure cost-conscious first-time buyers - who don't face the hurdle of a home to sell - into their showrooms.
Strong competition from nearly-new homes and foreclosures are the primary reasons that most builders cite for the weakness. Tight credit market conditions for mortgages are also a problem. But at the end of the day, the issue is jobs and confidence in the future, both of which are lagging.
The only good news is mortgage applications, which have trended up in response to record-low mortgage rates in recent months. All of that activity is concentrated in refinancing, however, which could put more cash in consumers' pockets ahead of the holiday shopping season, but won't do much to help builders.
The fallout for employment is particularly disturbing, as new homes create a lot more jobs for the dollar spent than existing homes. Indeed, builders have begun to walk away from developments that have plummeted too far in value to salvage, which will leave banks with a new round of write-offs, and could further tighten credit conditions for builders and buyers.
On net, we knew housing would falter with the end of the tax credits. The degree to which conditions are deteriorating, however, is alarming, and raises the risk of a double dip quite significantly.
I am off to the Kansas City Fed's Jackson Hole, Wyoming meetings tomorrow, and expect to feel a lot of unease from the audience. I am starting to develop an enormous sympathy for Fed chairman, Ben Bernanke's perspective, and would rather see the Fed try to do more to stabilize the economy, even if it fails, than look back on this period only to realize it missed an opportunity to do something. Of course, it is much easier to be on the sidelines of these decisions, and my hat goes off to all of those trying to do what is best, including those who are worried about the downside to additional stimulus.
Most of those criticizing the Fed, however, have never actually walked in their shoes. My complaint with my academic friends is that as much as I respect their grasp of theory, they have little experience with reality. They have tenure, have never been held fully accountable for their decisions, and they can't be fired.
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